When you start a family, priorities across all areas of your life change. One of the biggest changes for parents concerns their financial situation. Latest Office for National Statistics data shows that the average cost of raising a child to 18 is currently £194,246 per child. This is based on part-time nursery costs, a state school education, after-school care and holidays.
It may seem an impossible task to plan for the future when faced with these costs. However, early and consistent action can make financial planning a less stressful experience. In this article we’ll discuss some of the actions you can take early in family life. We’ll also discuss considerations concerning your children in later life.
Build an emergency fund for unexpected funds
Murphy’s Law states that anything that can go wrong, will go wrong. So you can be sure that as you approach holidays, Christmas, birthdays or other costly times in family life, your boiler will break, your car will require repairs or any number of other financially draining emergencies. These unexpected bills can be a source of financial anxiety for many. So an easy-access emergency fund built up over time can be helpful.
You may choose a savings account or a cash ISA for your emergency fund. However over longer periods, investments including Stocks and Shares ISAs perform better and historically have greater growth* than savings interest. Currently there is an annual ISA allowance of £20,000 per tax year. This may be split in any configuration between Stocks and Shares ISAs and cash ISAs, but the total investment across all ISA accounts must remain below £20,000. From April 2027, this will be changed to a limit of £12,000 for cash ISA investments for those under 65. The overall ISA allowance will remain at £20,000, with the £8,000 difference designated solely for Stocks and Shares ISAs. Those over 65 will retain the full cash ISA allowance of £20,000.
Whether you choose a cash or Stocks and Shares ISA, any growth earned* is free from tax. Both provide easy access to funds with withdrawals available at any time. So if you need to access the money in an emergency, you can. If not, the money will remain working hard for you. The longer your money is invested, the better, in terms of growth, giving greater opportunity for any fluctuations to flatten out. The power of compound interest also means your funds are able to grow more quickly.
Put money away for your child’s future
A Junior ISA (JISA) is a tax-efficient way of savings for your children’s future. Funds can be earmarked for their first house, university or perhaps their wedding! Even small amounts invested each month will add up by the time they are 18 and can access their funds.
For example, £100 per month invested for 18 years, assuming a 5% average annual growth, will give a potential pot of £35,000.
Whilst a parent or legal guardian must be the one to open a JISA for their child, anyone can contribute to it. A maximum of £9,000 may be saved in a JISA per year. This is in addition to the £20,000 adult ISA allowance. Growth earned* in a JISA remains in the account, which grows the total balance. This gives greater potential for growth, and is known as compound interest.
As aforementioned, the funds in a JISA may not be accessed until the child turns 18. At age 16, the child gains control of the account, and along with it, decision-making responsibility of where the funds are invested. After 18, the balance can be removed as a tax-free lump sum or smaller amounts, as required. If no other instructions are given, the JISA will mature into an adult ISA. This means your child can continue savings for their future and investing towards financial goals.
You can find out more about how to give your child a financial head start with a JISA in our previous blog post.
Reduce the financial burden of your later years
As you become older, you may have different financial burdens that weren’t a consideration before, such as health support, care homes, etc. At this time of your life, you’re likely to have less income as you may no longer be working. Without prior planning, this may mean you rely on your adult children for financial help.
Along with other savings and investments you may have, pensions can reduce your financial burdens. Your state pension is unlikely to provide enough income on its own to support you in retirement. A private pension can provide an additional income stream, and is built up over many years.
The amount individuals can invest in pension schemes per year is capped at £60,000, or 100% of your ‘relevant earnings’, whichever is lower. You can find out more about this in our previous blog post. Those earning over £200,000 per year may be subject to a tapered annual allowance for your pension investments. You will automatically receive a 20% boost on your pension investments, known as tax relief at source. Higher- and additional-rate taxpayers can claim an additional 20-25% via self-assessment. From age 55 (rising to 57 in 2028), you may drawdown from your pension if you choose. 25% of the value of your pension pot is tax-free, with the remainder taxed at your standard marginal rate of income tax, upon withdrawal.
Taken a career break to raise your family?
Eligible employees will have a workplace pension that both they and their employers pay into. This is due to workplace pension auto-enrolment introduced in 2012. Many parents take parental leave when they have a family. This may be short-term, as maternity or paternity leave, or a longer career break. For shorter term parental leave, employers will continue to pay into your pension based on your normal salary. The employee contribution will also continue, but based on their received income.
Those in receipt of maternity pay will have significantly less disposable income than usual. This may impact private pension contributions too.
Parents should be mindful of the potential of lower pension contributions, both private and workplace. Additional investments can be made, when finances allow, to bridge this gap.
Inheritance tax planning
Inheritance tax (IHT) is a tax due, based on the value of an individual’s estate following their death. It is currently due on estates worth over £325,000. This is known as the nil-rate band. A 40% charge is applied on the estate value above the nil-rate band. If an estate includes a residential property that is being passed on to children or grandchildren, an additional £175,000 nil-rate band is added to the calculation. This takes the total nil-rate band up to £500,000.
In 2024’s Autumn Statement, the government announced that from April 2027, unused pensions will be included in the estate value calculation for IHT. You can find out more about upcoming changes to IHT in our previous blog post.
To reduce the IHT due, individuals can take preparatory steps by making financial gifts to friends and loved ones. If there is at least 7 years between the gift being given and the individual’s death, the full gift value is exempt from the estate value. For gifts made between 3 and 7 years prior to the individual’s death, if the amount will take the estate value above the IHT threshold, the gift recipient must pay the IHT due on a tapered scale, on the estate value above the threshold.
It may seem that making financial gifts to lower your estate value is a simple way to lower the IHT burden for your children. However you must also ensure that you have left enough money to see you through your retirement. Shielding your loved ones from IHT should not come at the expense of a reasonable standard of living through your later years.
Additional protection insurance
It can be prudent to consider protection insurance when you have a family. These can include income protection and life insurance. Protection insurance can be vital when financial planning for family life. Some employers may offer various protection insurances as employee benefits.
How can Willday Wealth Management help?
Whether you’re just starting a family or have a young family already, there’s generally a lot going on. Adding financial planning to your plate may be too much. Not to worry – our expert team at Willday are here to help! We’ll help you understand the different options available to you. Plus, we’ll help you make the best tax-efficient decisions for financially supporting your family both now and in the future.
Call us on 0116 222 0119 or email hi@willdaywm.co.uk to start the conversation.
*With investing your capital is at risk and you may get less than what you invested
